Four years after home prices hit their peaks, CNNMoney looks at how 330 metro areas have fared.

Source: IHS Global Insight/PNC Financial Service

As of October 27, 2008 year to date, the Dow Jones Industrial Average has lost 37% of its value; the first 27 days in October accounted for an unprecented 20% of the Dow’s YTD losses. The NASDAQ is even worse, down 42% year to date. Investors have seen a staggering $8.3 trillion dollars evaporate in the stock market so far this year.

As if things weren’t bad enough, Hawaii investors trying to escape the bloodbath in the stock market by moving their investments into real estate are finding Hawaii’s real estate market a tough alternative. Real property values on Oahu so far have bucked the national trend of downward spiraling prices. This means high acquisition prices and low, or even negative, cash flows for investors. “On Oahu, investors are happy to just break even and avoid a negative monthly cash flow,” says Carlton Choy, a Broker In Charge at Premier Realty 2000.

Fortunately, it’s not all gloom and doom. Hawaii investors are turning to a safe and stable investment vehicle and are taking advantage of the downturn in California’s real estate market. Hawaii investors are finding big opportunities in Orange County, California.

There are hundreds of 2 & 3 bedroom homes in Orange County that are owned by banks that had to foreclose on the delinquent owners. These homes that sold for $300,000-$400,000 a few years ago, can be purchased today for as little as $100,000. That’s a 60%+ discount. Investors can buy these homes at 30 cents on the dollar. These homes generate anywhere from $1700-$2400 a month in rent. After all expenses, investors are experiencing positive cash flows of about $400/month per unit equating to a double digit return on investment. While double digit ROI’s and hefty positive cash flows are great, the real investment value is in its future value. It’s a reasonable assumption that these homes will return to the same value it sold for a few years ago. Where else can you invest your money today and reasonably assume that it will triple in value in the next ten years?

In contrast, owning or buying investment real estate on Oahu for the same amount of money will get you a small studio and a negative cash flow. On top of that, since Oahu has held its value, you’re paying “retail” for that property and future value is much more speculative. “I meet with investors several times a week looking to invest in Oahu real estate,” says Elliot Lau, a Broker In Charge at Premier Realty 2000. “When I show them the opportunity in OC, their initial response is that it’s too good to be true. That’s how great the opportunity is right now, and we have real numbers to support it.”

How can you tell that OC real estate is such a great opportunity right now? Follow the pros. Professional real estate investors lead the markets while amateur investors chase the markets. Right now, the pros are buying in OC. A leading indicator of real estate markets is the months of remaining inventory (MRI). It is used to gauge the type of market at any given time. 12 months ago, OC’s MRI was at 17 months; an extrememly strong buyer’s market. In less than 12 months, OC’s MRI is down to 7 months, considered to be a neutral market. Take one guess as to who’s buying all of that real estate? It is no longer a buyer’s market in Orange County. Premier Realty 2000, which has offices in Honolulu and Orange County, has helped many investors reposition their real estate holdings from Oahu to Orange County and triple their return on investment and cash flows. Investors like Paul Lam and Jared Nakamoto of Honolulu see this as a “no-brainer” and are buying as much as they can before this window of opportunity closes. “We expect that there’s about a year remaining for investors to invest in Orange County with such favorable conditions.” says Brian Laughlin, President and Principle Broker of Premier Realty 2000, heading the Orange County office. “The smart investors are seeing that Oahu real estate is not the place to be investing and that Orange County currently offers investors a rare combination of low acquisitition costs, great cash flows and tremendous appreciation potential in a safe and stable investment vehicle.”

Depending on your area, many times it is not that hard to find a great real estate deal. In some areas you’ll see 20 to 50 percent as distressed sales. Even with this type of market, there tends to be an elite class of properties that stand out among the distress category.

It could be because of location, condition, price or terms that cause these types of properties to be stand outs and it is in this category that I’ll share some secrets as to how to get them.

PART I

Short Sales

Based on price these seem to be one of the most attractive categories to pick from. Not only that, but there are so many of them. The problem with short sales is that it comes with a HUGE contingency. It is subject to the lender’s approval.

That means the buyer and seller can agree on the price and terms, but it means nothing until the bank approves it. Many banks have a loss mitigation department and their objectives can be quite different from the seller and buyer.

Tip 1

One key is to work with approved short sales . That most likely means an offer was submitted and the bank had approved that offer and for some reason it fell out of escrow. The buyer and seller already know that the bank will accept the price they did previously. This helps a lot when looking to purchase short sales.

Tip 2

It’s a numbers game. Most experienced short sale agents do not think much of the first offer(s). The Listing agent knows it just starts a process with the bank and that statistically the buyer will end up finding another property instead of waiting 4 to 12 weeks for a response. In this case, a second key is to recognize that purchasing short sales is a numbers game and it usually takes about 10 offers to equate to 1 close. Play the game correctly and you’ll have a valid chance at owing some really good properties.

Tip 3

Think in nets. Usually, a good story and a strong qualified buyer with a large down matters to sellers and is essential to getting your offer accepted. With banks being so overwhelmed with loan defaults, the standard mode of operation is the path of least resistance. The primary indicator that they use is what they will net from this sale. So when making offers, look to see how you can show that the bank will net the most from working with you.

Tip 4

You MUST have an agent team that is aggressive in follow up. Remember, your offer may be used just so that the Listing agent can start talking to the right bank department or person and you can easily be ‘forgotten.’ I can think of over a dozen stories like these from other agents in the past 2 weeks! Follow up is a must and you need to have someone who has the resources to do it.

Tip 5

Keep your deposit check. There is no reason to open escrow when such a major contingency exists. You can not tie up the property by being in escrow. Let’s say you open escrow and wait 8 weeks. In that time 4 other offers come in and are presented to the bank. The bank can accept another offer even if you are in escrow.

Tip 6

Work with an experienced team. Don’t get sold on what an agent can do for you, have them prove it to you. That’s right – if you miss this step you can waste a lot of time. Many agents do not have successful experience in this area, transact too infrequently or do not have a team.

Experience

If they are learning on you then you could be paying too much or missing out on the best deals. Ideally, you want someone that has been through a market cycle before, is working fulltime and has no other occupation. They should have specialization in what you are looking for. An easy way to tell is to look at their business card. If they are not even trying to brand themselves as an expert in the category you want, then why take that chance working with them.

Transactions

They should have no less than 10 qualified active buyer clients. If you are the only one or 1 of 3 then you should run. If you needed to do brain surgery, would you want a doctor that does 1 every 6 months or see the doctor that has 1 to 2 surgeries every day. There is safety in crowds and working with an agent that doesn’t have a strong active client following in your category is a huge indication to ask a lot more questions.

Team

If they do not have a team (a real team) that can service you then there is really no way you can find the best deals. The reason – it takes a lot of hard work. This is not rocket science type of hard, more like ditch digging hard. If you want a Grand Canyon real estate steal then you need to have an agent team that can throw their resources behind you.

Caution, don’t get tricked by a franchise name thinking familiar is better, because the reality is that all of their agents are independent contractors and the ‘team’ may be nothing more than promotion and not the ditch digging hard work needed to win the best real estate deals.

The best way to find out is to ask who is on the team, what do they do and how will they service you.

In the next series we’ll talk about how to get the best REOs on the market.

How Low Will They Go?

People have a major misunderstanding of what they expect to accomplish when trying to purchase distressed or bank owned property. I emphasize trying because those same people end up never buying anything.

So how low will the bank go on a short sale or REO? If you’re hoping for a number, you can stop reading. If you’re hoping to steal the property, you can stop reading. If you’re hoping to buy property for 50% of market value, you can stop reading. If you’re hoping to wait and buy the property for less by dealing directly with the bank, you can stop reading.

There are four things you need to understand: 1) The bank only accepts short sales when they believe it’s in their best interest! 2) Banks do not voluntarily accept losses. 3) Banks will always try to limit their losses. 4) Banks know the fair market value of the property.

These four are in no particular order. If they were, number four would probably be number one. I talk to people on a daily basis who want to make offers so low, I can only assume they think the bank has no idea what the property is worth. Don’t be so naive. The bank has a legal obligation to get the highest amount possible for any property. The bank can even be held liable for the difference if they are negligent in approving a sale that is too far under fair market value with no justification. Stories of someone picking up a property at 50% of market value are either urban legend or missing critical factors that played a part in the purchase.

You Can Get Good Deals In Distressed Real Estate

Yes you can. Just be realistic. If you think you can purchase real estate at a 50% discount, you’re not realistic. There isn’t one single situation, no matter how desperate, that would cause an owner to sell their home for 50% under market value when an experienced Realtor can sell that same house for 30% under market value in the same amount of time under the same conditions. Anyone who tells you they did is leaving out part of the story. However, it is very possible to buy distressed homes at a 25% discount. Anyone who tells you a 25% discount isn’t a good deal, doesn’t know real estate or investing in it and you’d be better off steering clear of the real estate advice they have to offer. As a matter of fact, a 25% discount on anything you buy, whether it be gasoline, groceries or a car, is a great deal.

I see so many people that won’t buy unless they can get it for no more than 60 cents on the dollar. They pass on property that’s 25% under market value. Big mistake, here’s why:

Let’s assume there are 10 properties with market values of $100,000 each. 9 of these homes can be purchased for $75,000 each (25% discount) and one at $50,000 (50% discount). This is a fair ratio for illustration purposes. In the real world, it could easily take you more than a year to wait it out for the 50% discount. It’s very possible that you never find something discounted that much.

Investor A buys the 9 homes for $75,000 each

Investor B buys the 1 home for $50,000

Assuming a 5% annual appreciation for each property, this is what each investors real estate portfolio would look like 5 years later:

Investor A’s Equity = $473,653 ($100,000 original FMV x 5% annual appreciation x 5years – $75,000 purchase price x 9 properties)

Investor B’s Equity = $77,628 ($100,000 original FMV x 5% annual appreciation x 5years – $50,000 purchase price x 1 property)

Investor B’s strategy to wait for the great deal cost him nearly $400,000. He made the mistake most amateur investors make; focusing on only one thing – discounted value. Investor A created wealth through leverage. Professional real estate investors know that leverage trumps discounted value every day of the year. Leverage is so powerful, had Investor A bought all 9 properties at full market value ($100,000), he still would have equity of $248,653 or triple Investor B’s investment with a 50% discount. In this market, you can buy real estate at a 25% discount all day long and maybe never find the 50% discount.

Top 10 Tips For Purchasing Short Sales and Bank Owned Property

1. Be realistic. Reread the tale of two investors above if you still don’t understand how being unrealistic can and will cost you dearly.

2. Get off the fence and get in the game. If you’re waiting for the market to drop, reread the tale of two investors above to remind you of how much waiting can cost. Learn more about timing real estate markets here: Secrets for Timing The Real Estate Market

3. Know the true market value of your target property.

4. When making an offer, be able to support the amount of the offer. Pulling a low ball number out of thin air isn’t going to work. If you don’t understand why, reread the four things you need to understand in bold type above.

5. In a short sale, the bank will only accept your offer if it’s a better alternative to foreclosure. This means that the bank will take the fair market value of the property in its current condition, subtract the costs of foreclosure and selling it as an REO, and the "fudge factor". The "fudge factor" covers the costs that will accrue if the bank has to take the property back at foreclosure and includes lost opportunity, risk of vandalism of the vacant property after foreclosure, declining market risks and time to sell as an REO. The "fudge factor" will be the only area the bank will be willing to negotiate. This is the supporting amount mentioned in tip #4.

6. In REOs, the bank can be more "motivated" during certain times of the year. They will generally be more likely to entertain low offers at the end of the month, quarter and year. The banks want to get real estate off their books and these calendar targets can create motivation. But remember, be realistic. Just because it’s nearing the end of the year, doesn’t mean the bank is going to jump at an offer that’s ridiculous.

7. Having access to REOs before they are listed can give you a big advantage. How do you get this information? Here’s one way: Hawaii REO Bargains

8. Don’t get emotional or stuck on any property. Real estate investing should be run like a business. Keeping emotions out of it allows you to make rational decisions.

9. Understand and accept the risks involved with these types of properties. To get the good deals, you will have to accept risks involved with them.

10. Retain the help of an expert Realtor with experience in these types of properties to help you. Don’t think you can do it yourself. That mindset can cost you thousands. Besides, as the buyer, you don’t pay for their services.

Hope this helps. Until next time, happy house hunting!

Elliot Lau

History of the Housing Market

Source:  Yahoo Video / ABC News

Nothing New

While it’s quite possible you’ve just recently heard of condotels, they have been around for a long time. Favorable market conditions and changes in investment policies of building owners spawned a large increase of condotel conversions and offerings to the public. As real estate prices sky-rocketed in the mid 2000’s, buyers looked to condotels which were generally half the price of an average size condominium. These buyers were also lured by the potential profits that were pitched by developers selling these units. While the potential is there, buyers need to know what they’re getting into and do their homework.

What’s the Difference?

A condotel can be zoned for both condo and hotel use. This means an owner can use the unit for either long term or short term use. While a residential condominium typically has zoning ordinances that require a minimum 30 day rental term if the owner will be renting it out, condotel owners are allowed to rent it out on a daily basis like a hotel room. In a condotel, there is a hotel operation and the lobby of the building will resemble a hotel. There is a “pool” of rooms that make up the hotel. A management company is hired to run the hotel pool. Owners of individual units can elect to put their unit into the hotel pool. Once in the hotel pool, the owner turns over control of the unit to the management company which in turn will rent it as a hotel room and pay the owner an agreed upon amount. That agreed upon amount varies depending on the management company.

Benefits of Condotels

Vacation rentals get higher rents compared to long term rentals. Short term rates can be triple the amount of long term rates. But the difference can be deceiving. While it is true that short term rates are much higher compared to long term rates, vacation rentals also have a much higher vacancy rate. An owner of a long term rental may get $1500 a month in rent with a one year lease. This same unit could get $150 a day as a vacation rental. If rented for 30 days, the rent for the month would be $4500. What many potential buyers overlook is the vacancy factor. The long term rental will have zero vacancy in 12 months; the vacation rental could easily experience a 40% or higher vacancy over that same period of time. Another reason for the growing popularity of condotels is the typically lower entry price level. Although much smaller than their condominium counterpart, buyers can get into the real estate game for much less. But there are some catches. Condotels usually don’t have a full kitchen and commonly only have a “wet bar” and they seldom come with parking. Another thing to consider is financing. Most lenders won’t make loans on condotels and the few that do will require large down payments sometimes as much as 35%.

Professional Management

Condotel owners can choose to put their units into professionally managed hotel pools. These management companies are chosen because of their track record to successfully run hotel operations. Vacation rentals are tricky to manage. By placing a unit into a hotel pool, owners don’t have to worry about renting it out, checking in and out tenants which could be daily, they don’t have to advertise, and they get paid regardless of any vacancy. The downside to placing a unit into the hotel pool is the management fee is pretty high; commonly half of the gross rents collected. Owners also give up control of the unit. Many buyers like condotels because they want to enjoy the use of it for a small portion of the year and can rent it out the rest of the time. A unit in a hotel pool might not allow for the occasional use of it by the owner.

Do Your Homework

Condotels can be the perfect investment and has many attractive features for the right investor. But be warned, for every satisfied condotel owner, there’s an owner that will tell you otherwise. The difference is as simple as asking the right questions before you buy. So many people get wrapped up in the hype and frenzy of new condotel offerings and fail to question or ask questions.

What to Ask

• What is the track record of the management company?
• What are the income projections based on? Know the difference between “Rack Rate” and “Net Rental Revenue”.
• What are the vacancy rates based on? What’s the average “room nights” per month? If the building has a current hotel operation, are the vacancy rates based on historical data and if so, is that same management company staying on after the building’s sales are done?
• Read and understand the Rental Management Agreement you will be bound by if you put the unit into the hotel pool.
• Ask how the Room Rotation is done.
• If there are amenities not yet built but are promised, question the time given for those amenities to be completed.
• Control your emotions and don’t get caught in the hype.
• What are the restrictions for personal use?
• What costs and plans are there to renovate each unit and replace furnishings?

Condotels in general are attractive to investors because of the high rents they can generate. But you need to know as much about them as you can. Each condotel has small unique differences. Don’t assume that if one project has a certain feature or benefit that all will have the same. While not for everyone, condotels can be a perfect fit for many. Just be sure to do your homework.

Good luck and happy house hunting!

Elliot Lau

“Like any real estate advice, this seems very positive. I agree with everything that was said, however, I think you have missed an important component. Location!
Depending on location you could purchase a piece of property that may never increase in value during your lifetime. Look at areas where severe economic hardship has set in (Detroit & Chester). I would like to see data that supports these timing statements. Graphs are always nice too.”

The response argued that location should have been mentioned as another important component. While I’d agree that location plays a factor in real estate, time is much more important. There are lots of components to consider when analyzing a real estate investment. If I included every one of those components here, it would be, at least confusing, at worst discouraging. Location has been widely accepted as the most important factor to consider. With that being said, let me dispell another myth:

Myth: There are only 3 things that affect the value of real estate: Location, Location, Location.

The response continued on to say “Depending on location you could purchase a piece of property that may never increase in value during your lifetime.” citing Detroit, MI as an example. While widely believed, that remark is incorrect. The fact is time, not location, would be the determining factor. Of more than 275 major metropolitan cities in the U.S., every one of them, including Detroit, has gained in value since 1980. Sorry, I’m still learning how to insert graphs here. Instead, go to OFHEO,the federal office that keeps these stats. Did you realize that since 1980, Michigan real estate prices have increased by almost 215%. Detroit over the last 5 years has increased 4.4%. Modest but at least an increase in value. Last year, the real estate values in Detroit decreased by 3.3%. These stats support the principle of time being the determining factor.

Time vs. Location

I was born and raised in Hawaii. I formed a belief from an early age that the Leeward coast on Oahu was a depressed and impoverished area that investors should stay away from. That belief is shared by most locals. In the mid 1990′s, I met a young investor who came to Hawaii with less than $100,000 in his pocket to buy real estate. He didn’t have any preconceived notions about the Leeward coast. Instead, he did his homework. He instilled real estate investment principles and, despite location, invested heavily into that area. Ten years later, he has amassed a real estate portfolio worth over $15 million. Time, not location, determined that. The area’s severe economic hardships have shown little or no improvement since the mid 90′s. Despite those economic conditions there, anyone who invested in that area 10 years ago has expereinced some of the best appreciation on the entire island. Imagine if he had not invested in the area for reasons of location and economic hardship. Real estate will always appreciate in value over time.

Real Estate Deals in Detroit

And just to show you that Detroit isn’t as bad as you think, check out this link: Detroit Deals. Professional real estate investors don’t follow the crowds or buy into prejudices. They use sound investment fundamentals to make their decisions.

I thank Turtle for his response and encourage more to do the same.

Happy house hunting!

Elliot Lau

There are 33 American billionaires that made their fortune from real estate. All of them collectively agree that nobody can precisely time any real estate market, not even them. So if these 33 people (whose combined net worth made from real estate totals over $80 billion dollars) admit that they can’t time the market, how can you? But before you give up on your dreams of becoming a real estate tycoon, there are valuable principles and practices used by each of these 33 real estate billionaires and most professional investors. Their secrets, mostly unknown to amateur investors, can be learned. They will all be revealed in this first and following educaltional series. This series will teach you the secrets, and mistakes, of the real estate billionaires to help increase your chances of not having to rely on social security for your retirement.

The Secret of Timing Real Estate Markets

Adopt the same techniques of those that have built fortunes in real estate. For starters, they follow this creed: First, Buy low and sell high and second, There’s never a bad time to buy, there’s only bad times to sell. If you incorporate this creed, you’ll begin to understand what all successful real estate investors have learned. It’s okay to buy high, as long as you sell higher. In fact, looking back at any time in history, the price of real estate at that given point in time was “high” at that time. I remember when my parents bought their first home in 1960. It was $50,000. It was, at that time, an obscene amount of money to spend on a house. That home today is worth over $1.5 million dollars. My point is that at the time my parents bought that home, the price of real estate was high. Did it matter that they paid a “high” price for that home? In hind sight, the answer is easy. In fact, it would have been a mistake to not have bought that home. Of course hind sight is always 20/20, but one fact remains. Real estate will ALWAYS appreciate in value over time. Yes, there will be peaks and valleys, but over time, it will always appreciate in value.

All successful real estate investors know that real estate is a long term investment. Sure, you can make money quickly in real estate. But the quick path is also filled with high risk, sleepless nights and will need a little luck. These types of investors are called flippers. They know that the higher the risk, the higher the reward. Investors looking to make the quick dollar better have deep pockets and an iron clad stomach. Flipping real estate is not for the faint of heart. One wrong decision can cost you everything.

So what’s the secret?

So what is “The Secret” to timing real estate markets? The secret is you don’t have to time markets to build wealth in real estate. All you really need is time. If you can adopt the discipline of patience and combine it with time, you have moved a huge step closer to financial independence. It is that simple. Mind you, I didn’t say easy. There’s a distinct difference between simple and easy. The next in this series will get into the nitty gritty and teach you to how to become a professional real estate investor.

Until then, happy home hunting!

Elliot Lau